Question

If the government lowers tax rates and tax revenue falls by $100 million, we can expect consumption spending to ________ and equilibrium output to ________.

Answer 1

Answer: increase; increase by more than $100 million

Explanation:

If the government lowers tax rates and tax revenue falls by $100 million, we can expect consumption spending to increase and equilibrium output to increase by more than $100 million.

It should be noted that when there's reduction in tax rate, this implies that there'll be more money available to the households and the firms and this will then lead to more money which can be spent on goods or services. Also, due to this, the equilibrium output will increase as well by more than $100 million.